Nomura has flagged the negative effect on India’s GDP growth as the United States announces 25 per cent tariffs on Indian products. It flagged a downside risk of 0.2 percentage points if the further negotiations fail and tariffs are maintained at 25 per cent.
Simply put, if India and the US fail to conclude a deal to bring tariffs down, the GDP growth rate could go down as much as 6 per cent in FY26.
Medium-term implications of tariffs
As India and the United States continue the talks on the trade deal, Nomura expects the Indian government could look at some compromise in sectors such as auto, while sticking firmly to the farm and dairy products issue.
Nomura says that in the medium term, India could look to diversify its export market to the United Kingdom, the European Union, New Zealand, and Chile, where it has signed a trade agreement with or is in the process of signing a trade deal.
However, given that the United States is the largest destination for indian exports and accounts for about 18 per cent of its total exports, diversifying its exports on such short notice is going to be very challenging.
Support package for SME?
If the 25 per cent tariff is finalised for exporters, Nomura expects a support package from the government for the SMEs. The support could come in various forms, ranging from export credits, interest rate subvention, additional credit from the banks or an additional export incentive. Some of this cost is likely to be shared by the banks
Effect on inflation
Elaborating on the state of the economy, Nomura expects inflation to fall below the 3% mark. While the Reserve Bank has forecasted an inflation rate of 3.7 per cent in FY26, Nomura expects a 2.8 per cent inflation rate in the fiscal year.
Interest rates
After the repo rate was cut by 50 bps in June, the Reserve Bank shifted its stance to neutral. However, Nomura expects a 25-bps rate cut in October and December. While the June rate cuts raised the bar for rate cuts in August to 10 per cent, however, given the recent developments, Nomura has raised the rate cut expectation to 35 per cent.